The Finance Professionals' Post educates readers in the finance and banking sectors on the forces that shape their business. The FPP is a publication of the New York Society of Security Analysts (NYSSA).

10/31/2012

Book Review: Red Ink

The federal budget is one of the key focal points for the presidential election. The candidates
have their proposals to reduce the budget deficit, however, political claims seem
to make the subject more confusing than clear. In addition, there are increasing worries
about the "fiscal cliff, " the tax increases and automatic spending cut coming in January
if Congress fails to act. Moody's has just threatened to downgrade the US triple-A rating
if Congress doesn't come up with a budget deal. The opposing political parties have
indicated little, if any, inclination to compromise. For those
seeking an objective picture of the federal budget, David Wessel's new book will be
welcome.

Wessel, economics editor of The Wall Street Journal and bestselling author of
In Fed We Trust, is undoubtedly qualified to give an in-depth look into the budget crisis. Because of the public's often misinformed view of the federal budget, his new book Red Ink: Inside
the High-Stakes Politics of the Federal Budget
is a necessity. Its easily readable form will keep the reader's attention on the main points.

Wessel begins with some graphic and disturbing statements that bring the reader right
into the reality of today's unsustainable budget, including: "Nearly two-thirds of annual federal
spending is on autopilot and doesn't require an annual vote by Congress," "the US defense
budget is greater than the combined defense budgets of the next seventeen largest
spenders," "Firing every federal government employee wouldn't save enough to even cut the
deficit in half." The biggest hurdle is government spending on healthcare, which is
projected to go from 25% to 35% of all spending in 2021. While many see the cost of the
Iran and Afghanistan wars as the major cost problem, Wessel points out the Medicare drug
benefit will cost more in time.

Federal income taxes are at the center of much politcal controversy on the budget deficit.
But as Red Ink points out, 46% of US households pay no federal income tax, and "The
share of income most American families pay in federal taxes has been falling for more than
30 years...We are now in 'The Age of Entitlements.'" This does not encourage public
willingness to solve the budget deficit with either higher taxes or lower spending, which
would be the rational approach and solution.

A huge hidden part of federal spending is tax breaks. These amounted to $1.1 trillion in
2011. The magnitude of this is that "The federal government gives up almost as much
money from tax loopholes, deductions, credits and other tax breaks as it collects in
individual and corporate income tax." As Erskine Bowles sums it up, "It's just spending
by another name. It's somebody's social policy." His deficit reduction committee
recommended ending these lopholes, tax breaks, etc., to reduce the deficit and lower taxes.
The proposal was rejected.

The adopted deficit financing solution has been borrowing. "For every dollar the US
goverment spent in 2011, it borrowed 36%, much of it from the Chinese." The dependence
on Chinese buying US government bonds has been a concern for a long time, but not enough
to prompt a sense of urgent political action. Instead, kicking the can down the road has been the
long-time preferred response. Fortunately US government debt is viewed as a safe haven
in troubled times. The credit risk yield of this debt remains an academic exercise—
until some point in the future.

Financial professionals should have a realistic view of the core of our capital
markets—the US Federal Budget, and our government debt. Red Ink should be on
everyone's must-read list.